UPDATE 1-SCENARIOS-Chile mulls options for peso intervention

(Updates with new forex graphic)

By Brad Haynes

SANTIAGO, Oct 20 (BestGrowthStock) – Chile may take new measures as
soon as this week to control its sharply appreciating currency,
which has tested the Andean country’s hands-off approach to
markets as it aims to become a regional financial hub.

Countries from Thailand to Peru have taken steps to curb
their strengthening currencies as investors chase high interest
rates provided by fast-growing emerging economies.

Chile Finance Minister Felipe Larrain warned, “We may have
something to say this week” as the country studies
“alternatives” for controlling the peso (CLP=CL: ).

The peso has strengthened more than 12 percent against the
dollar since the end of June. But the country has held off so
far on buying dollars in the local foreign exchange market (Read more about international currency trading. ),
like Colombia, or raising taxes on foreign investment in local
assets, as Brazil has done twice since the beginning of
October.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a Latam forex graphic, see http://r.reuters.com/qaq49p For a Chile forex graphic, see http://r.reuters.com/raq49p Factbox on steps to counter hot money [ID:nSGE69503F]

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As its peso hovers around 485 per U.S. dollar, near
28-month highs, here are some of Chile’s options:

ENCOURAGE CAPITAL OUTFLOWS – LIKELY

One likely approach would be to offset incoming investment
with increased capital outflows.

President Sebastian Pinera, a billionaire businessman, said
this week in London that he is not planning capital controls,
and he would like to stem the peso’s appreciation by
encouraging more Chilean investment abroad.

Last month Peru raised the amount of assets that pension
funds can hold overseas in an effort to increase dollar demand
and lessen the pressure placed on its currency by capital
inflows.

Chile’s central bank has already lifted the limits on
investment abroad for local pension funds by as much as 20
percentage points over the past two years.

Few of the funds in the privately-managed pension system
are now investing in foreign assets to the maximum extent
allowable. Even with greater freedom to invest abroad, it isn’t
clear how much more of the $138 billion under management would
be moved out of peso-denominated assets.

ADJUST HEDGING FOR PENSION FUNDS – POSSIBLE

A change to hedging regulations for the pension system
would be more likely to trigger an immediate market reaction.

In January, an adjustment to local pension funds’ hedging
requirements reduced their bets against the dollar in the
forward market, triggering a dramatic peso sell-off that
weakened the currency nearly 8 percent in less than two weeks.

Then as now, the peso had appreciated sharply, touching its
highest levels in more than a year. Confusion about the new
hedging requirements was enough to shock a nervous market, as
pension funds bought back their hedges and exacerbated the
local currency’s drop.

BUY DOLLARS ON THE MARKET – UNLIKELY

A direct intervention in the local foreign exchange market (Read more about international currency trading. )
remains unlikely at the peso’s current level but could have a
major short-term impact.

The central bank has not intervened since 2008 and has
accumulated more than $25 billion of international reserves.
Daily volumes in the local currency market average a little
more than $1 billion.

Central bank Vice President Manuel Marfan said on Tuesday
the bank had not discussed intervention, although he said the
peso was already pushing slightly past values justified by
economic fundamentals.

The central bank may look closer at intervention if the
peso continues appreciating despite a slower pace of interest
rate hikes. The bank raised its key rate by 25 basis points
last week after four 50 basis-point increases, citing the
strong peso, but said rates will keep rising. [ID:nN14173354]

When the central bank last intervened, authorities waited
until the market flirted for nearly a month with levels around
430 per dollar before stepping in to buy greenbacks.

FOCUS ON EXPORTERS – LOW IMPACT

The government could extend direct aid to exporters feeling
the currency squeeze, offering them help without significantly
affecting the exchange rate.

Already Chile has extended small businesses credit in
dollars through a state bank and worked to increase farmers’
access to hedging operations. The government could expand those
measures or offer new tax breaks for exporters and Chilean
countries investing abroad.
(Editing by Hugh Bronstein and Chizu Nomiyama)

UPDATE 1-SCENARIOS-Chile mulls options for peso intervention